Small business column: How to determine what to charge

“How much should I charge?” is one of the toughest questions when you’re starting a small business or launching a new product or service.

It can be particularly tough when yours is a service business — should I charge $50 for a haircut or $150? — but even when selling a product, determining the right price is challenging.

Setting fees is more of an art than a craft. So how do you know where to set your prices when you’re first starting out?

Here’s a four-step process to help you find your optimal price point:

1. Do your research. Know what’s happening in your market before you set your initial prices.

If you sell a product, be sure to check online prices as well as brick-and-mortar stores. In service businesses, call around so you understand the prices your competitors will offer prospective customers.

2. Test the market. Don’t take the existing pricing structure for granted.

You may have reason to charge four times as much as your nearest competitor. Your upholstery shop might offer higher grades of fabric or better workmanship.

Alternatively, you might find that lowering your prices, charging $300 for the same type of upholstery service, enables you to quickly capture a lot of customers.

3. Offer different price points. One way to both test the market and reach more customers is to offer different levels of service.

Consider ways you can offer small, medium and large versions. Most online services already do this.

Try this in your business, too. For example, a wedding videographer could offer a base service of taking photos or raw video at a wedding; “pro” could include post-production editing and “premium” could include advanced editing and creation of a deluxe wedding album.

4. Explore different pricing models. Consider these options:

• Retail. Selling directly to the end-user or consumer through a physical location or e-commerce.

If I’m creating a new commuter bicycle, I could sell directly to consumers online or open a store. If I do that, I receive the full, retail price and also own a lot of information about the customer, but I have the significant expense and difficulty of finding, retaining and serving the customer.

• Wholesale. Selling to retailers who sell to end-users.

In this scenario, I would market my bike through trade shows and to bicycle shops. I would receive less money per bike but have the potential of reaching far greater numbers of customers. And I don’t have the cost of setting up and running direct sales.

• Subscription. Offering access to my products or services on a continuing basis for an ongoing fee.

This is a great model for many businesses: You get recurring revenue and an ongoing relationship with customers. Many online services do this — think Netflix — but you can do it with many other types of services and some products.

For example, in many cities you can sign up for access to bicycles located throughout the town rather than having to bring or buy your own.

I often warn small businesses of the dangers of trying to compete on price alone, so be wary of trying to be the low-price leader. It’s hard to make a significant profit, and bigger competitors typically are able to undercut you in the long run.

Remember, setting prices isn’t an exact science. So don’t be surprised if it takes you a while to figure out the amount to charge that’s just right.

Rhonda Abrams is president of The Planning Shop and publisher of books for entrepreneurs. Her most recent book is “Entrepreneurship: A Real-World Approach.” Register for Rhonda’s free newsletter at PlanningShop.com. Twitter: @RhondaAbrams.

WHY WE PAY MORE

Customers often will pay more for the same or very similar product depending on a number of factors, including these:

• Brand. Brands enhance customers’ familiarity and comfort level with your products and services. With small businesses, a company’s reputation may be thought of as its brand.

• Convenience. You often can charge more when you make it more convenient for the customer — better location, delivery or faster service.

• Word of mouth. Prospects trust referrals from people they know. You’re far more likely to go to a restaurant, hire a plumber, or download an app that a friend recommends.

• Specialization. If you are seen as someone with particular expertise or knowledge, you can charge more. Targeting a niche market — such as an industry or demographic group — and learning its specific needs enables you to get higher prices.